Increasing Labor Productivity: A Mixed Blessing?

Increasing labor productivity is generally hailed as a positive outcome of technological innovation. The production of more goods and services with fewer hours worked allows for both higher standards of living and decreased inflationary pressure, since wage increases can result from increased productivity and are not translated into higher costs for goods and services. Increased labor productivity has been promoted through government policy, such as tax breaks for capital investment and direct investment in technological innovation. It has also been promoted ideologically by both the left (Karl Marx for example) and the supply-siders.

However, in a world of limited natural resources, and high unemployment, perhaps increased labor productivity is too much of a good thing. If increased labor productivity were translated into fewer hours worked as well as increased wages for workers, along with lower, or at least constant, prices for goods and services, it is possible that labor productivity improvements would be seen as a pure benefit. However, there would still be the issue of environmental degradation and resource depletion. It is also clear, particularly in the U.S., that increased labor productivity has not been a boon to workers.

Since 1980, average labor productivity in the US has increased 2% per year yet average worker pay has remained stagnant and the average number of hours worked has not decreased. The great promise that increased productivity would lead to increased wealth and leisure time seems to not have come true for the majority of workers. Increased productivity has led to increased profits instead of higher wages. Increased labor productivity has also led to increased levels of unemployment. Fewer workers are needed to produce the same amount of goods and services.

While unemployment levels in OECD countries are decreasing since their post-financial crisis highs, an important debate in the academic literature, as well as in popular literature and policy circles, is whether higher unemployment rates are the new norm. In other words, are the higher unemployment levels now experienced in many nations structural or cyclical: part of the structure of the economy or just a temporary result of the downturn?

There are valid reasons to believe that higher unemployment rates may well be structural in wealthier OECD nations due to the globalization or production, increased wealth disparities, and a host of other issues. Fundamental to this conversation are the limitations in potential growth in material wealth based on ecosystem and resource constraints. On an infinite planet, economic growth could continue unhindered and unemployment would be purely a coordination problem. However, given resource and thermodynamic constraints, continued economic growth is constrained to growth in services and quality (not quantity) or goods. To move to a service-based and quality-focused economy requires economic restructuring (and a different mindset). Given our current industrial structure, a return to full employment, if it does occur, cannot be long-lived.

The problem of resource constraints is actually exacerbated by increased labor productivity– the resources are depleted at the same or higher rate. It’s just that energy and machines are doing the depleting rather than human labor.

There is no one solution to structural unemployment but there are strategies to reduce the problem. France approached the challenge of unemployment and increased productivity by legislating a shorter workweek. In the U.S., if the gains from productivity were distributed to the worker, many worker could work 30 hours per week or less at the same salary levels as they had in the early 1980s. This would make room for additional workers to enter the workforce. So one solution to structurally higher unemployment rates is to mandate a shorter workweek and ensure that worker compensation reflects productivity increases.

Another important element of reducing unemployment is increased education. Less skilled workers can more easily be replaced by machines. Less educated workers have seen a decrease in average wages since 1980 and currently experience the highest unemployment rates. Then, of course, there are professions where productivity increases are possible but workers are much harder to replace, such as education and medicine.

The rush to automate continues. As the human population grows and resources become more scarce, we may fine that we wish to back-track and starting using more human labor for production. Or we might even be forced to do so.

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